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Published On , 17 Jan 2017 By ET Wealth
For every individual the time available to build wealth is limited to the years when he is working. This period is called the accumulation years. For most people, post his retirement comes the time for distribution of wealth. This is the time when he will use his accumulated wealth to meet his and his family's expenses.
During the accumulation years, an individual gets to choose from a multitude of financial assets and products to invest in. The important thing here is that which of these available products will optimise his long term returns without exposing him to risks that is not commensurate with his risktaking ability.
Financial planners and advisors say that every individual should start saving and investing as soon as he feels he is ready to start investing. A 20-year old student is willing to save Rs 1,000 and invest. On the other hand, there are instances of even a 50-year old is not able to save and invest anything.
Recurring deposits (RDs) in banks give a market-determined rate of return. Money in RDs have nearly zero risk. However, returns from these just about match the rate of inflation and hence there is no wealth creation after adjusting for inflation. Also returns may attract tax.
Historically, average returns from real estate and NSC were 7.8% and 8.8% respectively. Real estate also has higher tax implications compared to NSC in which the interests that accrue every year qualify for some tax deductions. End of the term interest income also attract tax.
Gold is another asset class in which a large number of Indians put their money in. Exceptional gains in gold comes in spurts when there is huge risk in most other assets. Strong returns in a bracket of a few years give the impression that gold can outperform other asset classes. Storage is a huge risk if one holds physical gold
Fixed income mutual funds have given an average annual return of about 9.4%. Returns from these attract very low tax rate in the long run since these qualify for indexation benefits. Earlier PPFs, which enjoy tax benefits, gave very high returns but of late returns have been made marketlinked.
Equity mutual funds carry some short term risks but over time risks come down substantially. Potentially this asset class can create the largest quantum of wealth. In addition long term returns on Equity mutual fund investments do not attract any tax.
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